accounting for PPP funds

Accounting for PPP funds

If you’re a small business owner, you may have recently received funds from the Paycheck Protection Program (PPP), which derived from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. These funds are designed to keep businesses afloat during uncertain times. The program also helps workers; its guidelines give companies direct financial incentive to keep all employees on the payroll.

If your business meets criteria, any money loaned by the PPP is forgiven. This is perhaps the most critical aspect of the program. But how does your company account for these PPP funds on the books?

In this post, we’ll help you understand the best accounting practices for PPP funds as well as help you understand the basic criteria for forgiveness of these funds.

Criteria for PPP Fund Forgiveness

PPP funds will be forgiven provided the business meets specific criteria. If these criteria are not met, the business must return the funds.

What criteria must be satisfied so that your PPP funds are forgiven? Here are two of the main points of reference:

Maintaining Employee Headcount

The number of full-time employees cannot have dropped from average monthly levels during 2019. This may require some businesses to re-staff. If your business launched in the second half of 2019, you can use the average headcounts from January to February of this year. Seasonal business owners can use the headcount from March to June. 

Maintain Salaries

For PPP funds to be forgiven, employers cannot cut salaries or wages. Don’t forget that PPP funds can be used for more than just payroll; they can be used to fund benefit packages, such as health insurance, vacation time, and more.

Initial Recordingaccounting for ppp funds

If you believe your business meets these criteria, your initial recording of these funds should be as a current liability, similar to deferred revenue. It’s important that the value of your PPP funds be retained in your accounting documents until you are released from the liability.

If you do not believe your business meets these criteria, you should classify these funds as a long-term liability. Keep in mind that forgiveness is not all or nothing. If you reduce your salaries, for example, you may still be entitled to a percentage of the PPP loan.

Subsequent Recording

Because of the unique nature of these funds, accounting for PPP funds will require special attention.

Filing Paperwork

First, your business must file the proper paperwork to document that you met the appropriate criteria.

Accounting for PPP Funds on the Balance Sheet

If your business meets the criteria, how do you show this in your accounting books? Currently, the PPP funds should be listed as a liability. Because you have been forgiven a debt, you will need to record this amount as income. Specifically, this should be listed as “other income” after income from operations.

If you forget to take this step, you may skew your gross margins and make it look as though your business performed better than it actually did.

Adjust Monthly Forecasts

Again, if your funds have been forgiven, you should be sure to record them in a separate entry for “other income.” This will also help you manage your operating income and produce accurate monthly forecasts.

What If I Don’t Receive Full Forgiveness?

If you only receive partial forgiveness for your PPP funds, you can still employ the above procedures. Although, in your case you will record the adjusted forgiveness amount rather than the total amount of the loan.

PPP Funds and Tax Preparation

We’ve offered advice on accounting for PPP funds in your books. We’ve provided this advice for the purpose of record-keeping. Please consult your tax account for how PPP funds may impact your yearly taxes.

Owning a business may seem overwhelming during this season of instability. But managing your books well can help you focus on maintaining and expanding your business.

Need assistance in accounting for PPP funds? Talk to one of our Fractional CFOs today!

Additional Resources: